Self-Interest and its importance within Economic Theory
The idea of a world filled with self-interested agents each seeking to maximise their own utility, although a bleak picture, is one critical to the foundations of economic theory. This idea stems from philosophers like Bernard Mandeville renowned for his discussions around human morality, with his most famous work ‘The Fable of Bees’ arguing that private vices produce public benefits and economic prosperity driven via competition. This philosophy is woven into economic theory as virtually all economic models rely on the assumption that consumers and producers are self-interested maximisers and will react to certain stimuli accordingly. Without such a truth government action would be futile as policymakers would have no indication as to how the population would react to policy changes.
However, many argue this assumption is unnecessarily rigid as the revelation of behavioural economics from researchers like Richard Thaler attests to. Behavioural experiments such as the ‘Dictator Game’ (Forsyth et al 1994) demonstrate the fragility of said assumption. The dictator game states a “dictator” is given an amount of money and can decide on a proportion to give to a “recipient” with no consequences attached to the amount they decide to gift. Results show dictators act in a benevolent rather than self-interested fashion and present a positive proportion to the recipient despite not having any reason to.
This raises the question, can the assumption that underpins such vast swathes of economic theory and thinking be trusted? And consequently, can the school of thought built on these foundations be applied to today’s economy responsibly?
What is Smith heralded for?
Adam Smith has been heralded as a champion of ideologies like Mandeville’s, surmised in the fact that the freedom of markets is superior to government intervention. His “The Wealth of Nations” (1776) indeed provided scepticism about the effectiveness of the “commercial system of Great Britain”. This scepticism was later acknowledged, interpreted, and adapted into a breadth of ideologies by neoliberal economists such as Milton Friedman and inspired the policies of two major 1980s governments under Thatcher and Reagan over 200 years later. The ripple effects of the stone in the lake that was “Wealth of Nations” could never have been imagined by Smith, and the ‘invisible hand’ of free market forces and their powers of allocation is still referenced by economists today.
Smith then, is defined by his admirers as a pure capitalist thinker who believed in the freedom of markets and the dangers of state intervention… or was he?
Why is his 1759 work relatively ignored compared to 1776?
Smith’s earlier work “The Theory of Moral Sentiments” (1759) is a lesser-known publication which states that our moral ideas and actions are a product of our nature as social creatures. This idea stemmed from David Hume a friend and fellow philosopher who influenced Smith’s outlook significantly, Hume argued moral principles are rooted in their utility rather than descended from God. Hume proposed that moral principles appeal to us as they promote our own interests but also those of our fellow human beings. Similarly, Smith wrote that due to our social nature we express empathy to one another and that our actions are not calculated but crafted in the guild of our upbringing as highly social creatures. Smith paints the picture of an ‘impartial spectator’ within each of us simultaneously approving or condemning one’s own actions, with these instructions o how to behave generated through our upbringing and observations of how those around us behave.
Perhaps the answer as to why “Theory of Moral Sentiments” is relatively less quoted than “Wealth of Nations” is that it might lead its proponents to contradict themselves. His 1759 work speaks of our innate sympathy for one’s neighbour that’s ingrained into our entire social construct, versus 1776 which illustrates an almost amoral picture of society whereby each person is and should only be concerned with one’s own interest. Such contradicting messages give rise to questions about Smith’s true philosophy, but perhaps those that champion him as the forefather of capitalist purism would rather leave those questions unanswered and ignored.
How did neoliberals and modernists misinterpret his message?
In more recent times philosophers have noticed said contradictions and revisited “Wealth of Nations” to gain clarity on its enduring message. Neoliberalism heralds Smith as a leader in the school of thought that markets should remain free and unhindered but alas it seems upon more recent inspection their interpretation of his message was misconstrued.
Smith did promote the idea of free markets, but not free from the state entirely. When Smith referenced the “commercial system of Great Britain” it seems he was not advocating the removal of the state from the markets entirely but directed his frustration more at the mercantilist state that loomed over the country at the time. The ‘invisible hand’ so quoted by neoliberals “was invoked not to draw attention to the problem of state intervention, but of state capture”.
Here Smith is referring to mercantile elites that had infiltrated and now dominated the state, who intervened in markets to further their own interest at the expense of the public, and thus Smith’s supposed advocation of capitalist purism is far from the truth. Neoliberals it seems jumped to conclude that Smith’s criticism of the state was a sweeping, generic statement applicable in any period. On the contrary, on further inspection. it is a very specific critique of those in power at said time and with the context of “Theory of Moral Sentiments,” we can see a clearer picture of what Smith’s own true sentiment might have been.
Self-interested capitalists are exactly who Smith was denouncing in his works, which at their core provide messages of empathy and speak to the power of societies to create collective and socially positive outcomes. At this point, it seems fair to point out that Smith would be frustrated with how his works have been perceived and apoplectic at the ideologies they continue to inspire. Smith’s parting message cuts across parties, ideologies, and political stances, explaining that real-world politics is far too complex for any one pre-packaged ideology to handle and that politicians should be morally and politically unbiased.
However, this seems ironically as utopic as the proposal put forward by any other ideology, proclaiming to have found the answer to our economic and political prayers. Smith might not have found the key to economic and political heaven, but I think we all owe him the decency of knowing what he ACTUALLY meant!
Edited and Reviewed by Tanish Bagga.
References/ Further Reading:  Fairness in simple bargaining experiments, Forsythe et al (1994)  We should look closely at what Adam Smith actually believed | Aeon Essays
Theory of Moral Sentiments (1759): Adam Smith
The Wealth of Nations (1776): Adam Smith